Daily Industrials: StubWorld: CK Infra/Power Assets, Amorepacific, JCNC and more

In this briefing:

1. StubWorld: CK Infra/Power Assets, Amorepacific, JCNC
2. Pasona : Interim Update – Still More Upside
3. Khi (7012) Given Expected Recovery in Profits, Shares Are Now Too Cheap.
4. CRRC: Earnings Booming With Raised New Rail Line Delivery Target
5. Ayala Corp Placement – Selldown by Mitsubishi Likely to Reignite Overhang Worries

1. StubWorld: CK Infra/Power Assets, Amorepacific, JCNC

This week in StubWorld …

• What’s up with Ck Infrastructure Holdings (1038 HK) reducing its stake in Power Assets Holdings (6 HK)?
• Trading around its lowest implied stub inside the past five years, improving sentiment toward cosmetic stocks should support an Amorepacific Group (002790 KS) setup.

Preceding my comments on CKI/PAH, Amorepacific and JCNC are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed as a % – of at least 20%.

2. Pasona : Interim Update – Still More Upside

INTERIM UPDATE – Pasona Group (2168 JP) released their second-quarter results on January 11th. This Insight updates our recent Insight Pasona Non-Grata and re-iterates our buy recommendation. Pasona shares have risen by 15% this year to the intra-say high last Friday. Our target price remains ¥1,500 – a further 18% upside from today’s level. 

3. Khi (7012) Given Expected Recovery in Profits, Shares Are Now Too Cheap.

The shares have underperformed TOPIX by 25% over the last 12 months and in terms of book, see chart below, are trading at near 5 year lows. Earnings for 3/19 were revised down after 1Q (operating profit from Y75bn to Y66bn due to write-off in the rolling stock division). The current forecast in our view is achievable and next year, in the absence of further write-off and growth in other parts of the business, we would expect operating profits to recover to the Y80bn level. This is a big conglomerate with many moving parts, some good and some not so good, but there is a price for everything and given where the shares are now, and where we think earnings are going, we are happy to buy here with the company trading at 0.9x book and the shares yielding just under 3%.

4. CRRC: Earnings Booming With Raised New Rail Line Delivery Target

Based on CRC’s (China Railway Corporation) 2019 plan on rail investment, CRRC’s earnings from rail business might be better than estimated. With a 45% increase on new rail delivery mileage, and significantly increase on HSR train (Multiple Units) repair demand, we estimate CRCC’s EPS increase by another 20% yoy to RMB0.53 in 2019E, following a 17% yoy increase in 2018E.

Also, a better earnings outlook might trigger a mild valuation re-rating. The stock trades at 12.8x P/E 2019E (our estimates), attractive vs. its 15.5x historical P/E average since the merger in 2015.

5. Ayala Corp Placement – Selldown by Mitsubishi Likely to Reignite Overhang Worries

Mitsubishi Corp (8058 JP) is looking to sell 9m shares of Ayala Corporation (AC PM) for approximately US$155m. Post-placement, Mitsubishi Corp will still hold 7.2% of Ayala Corp if the upsize option is not exercised.

The deal scores poorly on our framework owing to its the large deal size relative to its three-month ADV. The company is also slightly more leveraged than its peers. However, it was offset by cheaper valuation and a strong track record. 

But, our deal breaker here is the fact that the selldown one year after 2018’s selldown may signal that Mitsubishi Corp. may return to sell more on the market again in the near-term. While Mitsubishi, in the past, has reaffirmed that their partnership with AC will likely continue, it should not serve as a reassurance that it will continue to hold shares in AC.